ALL CONSUMING; To Prove You're Serious, Burn Some Bridges

By David Leonhardt

Published: October 17, 2005

WITH good reason, the Royal Swedish Academy of Sciences spent a lot of time alluding to apocalyptic nuclear war when it awarded the Nobel Memorial Prize in Economic Science last week and never got around to mentioning local movie theaters or phone plans.

The prize winners -- Robert J. Aumann and Thomas C. Schelling -- are arguably the only Nobel laureates who can claim to have helped preserve the human race. Their work on game theory during the cold war showed that it was not enough for the Americans and Soviets to be able to destroy each other.

To avoid war, each side had to understand the other's power and know that a preemptive attack could not prevent a counterattack. Weapons were actually more important to protect than citizens. Destruction had to be both mutual and assured.

But the basic insight -- that lending credibility to a threat or promise often is not as easy as it seems -- has a lot to say about dozens of other matters more mundane than the cold war. If anything, the idea plays a larger role in today's economy, when many transactions are faceless, taking place online or on the phone, than when Professors Aumann and Schelling were making names for themselves in the 1950's.

''This permeates life,'' Mr. Schelling said by telephone from Maryland last week. ''I find it important in dealing with children, dealing with spouses, dealing with neighbors, dealing with customers.''

The biggest problem with making an effective threat is that backing out can be so easy. In fact, it can often be less painful than making good on the threat. Three-year-olds have a particularly keen understanding of this, which is why a piercing scream has defeated many an effort at vegetable feeding.

Mr. Schelling, in writings famous for their charming examples, explained how people could make their word seem credible. Some ways are formal, like a cellphone contract. Others are less obvious.

These subtler methods usually involve something that seems rather strange on its face: people taking steps to restrict their own options. In effect, they are removing choices that they fear they might later make -- and sending a message to their antagonists.

The ancient Greek historian Xenophon, who earns a footnote from Mr. Schelling, argued that putting an army in a corner might improve its odds of victory. The enemy would then know that retreat was not an option.

''Nay, if the result of crossing is to place a difficult gully behind us when we are on the point of engaging,'' Xenophon wrote, ''surely that is an advantage worth seizing.''

More than two millennia later, the Truman administration asked Congress to put seven military divisions in western Europe to prove that the Americans truly would treat a Soviet attack on an ally like an attack on the United States, noted Mr. Schelling, a professor emeritus at the University of Maryland.

''The question was asked, 'What can seven divisions do to stop a Soviet attack?''' Mr. Schelling said. ''And the answer very explicitly was: They can guarantee that if the Soviets attack and kill or capture 300,000 Americans, the war won't end there.''

By explaining what was really going on in situations like these, Mr. Schelling gave people a better grasp of their own instincts. With this self-knowledge, they could react even when the stakes were not quite life and death.

In Hollywood, the science of credible threats has allowed for the maneuvering behind movies' opening dates. The best example might be ''Independence Day,'' the 1996 blockbuster that scared other big films away from opening on the lucrative July 4 weekend.

With that title, 20th Century Fox forced itself to stick to its plan or risk humiliation, noted Edward Jay Epstein, the author of ''The Big Picture,'' a study of the movie business. Other studios believed the commitment and cleared a path for what became a huge opening weekend.

The Vanguard Group and other mutual fund companies have given investors a similar ability to make commitments to themselves and avoid bad habits. Vanguard recently started a program that allows people to commit to increase the amount of income they save in future years.

Eschewing an iPod Nano to save a little money right now is not so easy. But agreeing to give up some undefined future purchase seems less painful. Once the money is put into a retirement account, it is difficult to remove it for next year's toy.

Along the same lines, Bank of America debit card customers can agree in advance to round up their purchases to the next dollar, putting the extra cents into a savings account, noted Susan Skeath, co-author of a textbook on game theory that the Swedish Academy cited as a good introduction to the winners' work.

As Barry Nalebuff, a game theorist at Yale, says, these are tricks that limit options and back people into doing what they really want to do but are afraid they will not.

The work of Mr. Aumann, a professor at Hebrew University, built the mathematical architecture supporting much of modern game theory, and it is often highly technical. But he also pointed out that when companies or people engage in repeated competitions, cooperation becomes a lot more common.

Movie studios planning opening dates come to understand each other and usually figure out when to yield. But the telecommunications upstarts of the late 1990's, largely doing battle for the first time, showed how making good on a threat can backfire.

In the rush to be the first mover, they each built miles of fiber optic lines to intimidate rivals. It became a game of chicken in which no one swerved off the road, helping cause its own kind of crash, this one in the stock market. At least the overcapacity has made phone and Internet service cheaper.

In hindsight, many of these ideas can seem a little too straightforward to be worthy of a Nobel and the $1.3 million that comes with the prize. But don't be fooled. Their simplicity is a big part of their elegance.

''Once Schelling said all this, everybody said, 'Of course,''' said A. Michael Spence, a Nobel laureate and a former student of Mr. Schelling's. ''But absolutely the best things in science and social science are the things that make everybody say, 'Why didn't I think of that?'''